Sterling falls by over 2.5 cents against the US Dollar

The pound weakened considerably against the US dollar yesterday, falling 2.62 cents (1.58%) to close the day at $1.6315.

• In early trading yesterday sterling jumped to a seven-month high against the greenback, as improved sentiment about the UK’s chances of economic recovery continued. This view was bolstered yesterday morning after the release of a surprisingly positive Nationwide consumer confidence survey, which showed people were more confident now than at any time in the past six months.
  
• In addition, better-than-expected UK Services PMI figures also buoyed demand for the riskier pound as the index came in at 51.7 points, up from 48.7 last month. The rise above 50 – the level signalling growth – was particularly significant because the recession-battered services sector makes up roughly 70% of the UK’s economy.
  
• However, news that monetary officials in China, Japan, India and South Korea would keep buying US Treasuries even if America’s credit ratings were cut bolstered the dollar mid-afternoon. Some of the dollar’s slide in the past month has been attributed to speculation that the US may have its credit rating downgraded, so these positive comments were particularly well-received, sending the greenback into positive territory mid-afternoon.
  
• The dollar’s gains were further extended in late trading yesterday after some traders booked profits from sterling’s rapid rise over the last ten days. Falls on the FTSE 100 also weighed on the pound late on, as it eventually finished over 2% down on the day.
  
• In early trading so far today the pound has weakened further against the greenback, as investors turn their attention to today’s important Bank of England interest rate decision, which is due at 12.00 BST , shortly followed by a statement. In the US, Unemployment Claims figures are out at 13.30 BST and Fed Chairman Ben Bernanke is due to give a speech at 13.45 BST.